Question

"Frances sells bottled water from a small stand by the beach. On the last day of summer vacation, many people are on the beach, and Frances realizes that she can make a lot more money this day if she hires someone to walk up and down the beach selling water. She finds a college student named Dmitri and makes him the following offer: They'll each sell water all day and split their earnings (revenue minus the cost of water) equally at the end of the day. Frances knows that if they both work hard, Dmitri will earn $80 on the beach and Frances will earn $160 at her stand, so they will each take home half of their total revenue: $80+$1602=$120 . If Dmitri shirks, he'll generate only $50 in earnings. Frances does not know that Dmitri estimates his personal cost (or disutility) of working hard as opposed to shirking at $20. Once out of Frances's sight, Dmitri faces a dilemma: work hard (put in full effort) or shirk (put in low effort)."

Answer 1

Remaining part of question:

In terms of Dmitri's total utility, it is worse for him to ________________ .

Taking into account the loss in utility that working hard brings to Dmitri, Sondra and Dmitri together _____________ better off if Dmitri works hard instead of shirking

Answer:

1. Put in more effort

2. Would be

Step-by-step explanation:

1. Dmitri puts his personal cost at $20 if he shirks, an amount that is implies $80-$20=$60

he would be having over half of their total revenue.

2.

Yes, if they both work hard, Dmitri will earn $80 on the beach and Frances will earn $160 at her stand, so they will each take home half of their total revenue: $80/2+$160/2=$120 . However, if Dmitri fails to work hard all of them would receive lesser returns.